If Ricardian equivalence is correct,any tax cut will cause consumer spending to:
A) increase.
B) decrease.
C) remain unchanged.
D) change in an unpredictable manner.

Question

Quizplus · Accepted Answer

According to Ricardian equivalence, if taxes are cut and the government's budget deficit increases, people will be forward-looking and realize that they will have to pay higher taxes in the future to pay off the debt. Therefore, they will save most or all of their tax cut, leading to a decrease in consumer spending. Thus, the correct option is that the consumer spending will remain unchanged.

If Ricardian Equivalence Is Correct,any Tax Cut Will Cause Consumer